Chained CPI is a proposed new method to measure how the Cost of Living Adjustment (COLA) is applied to Social Security and Railroad Retirement benefits. Essentially, Chained CPI takes into consideration the shift in consumer purchasing habits when the costs of certain items increase differently. In a simplistic example, if the cost of hamburger meat increases by 5% and the cost of chicken increases by only 1%, the Chained CPI method of calculating the COLA for these two items is 1% because the consumer has the choice to shift their meat purchases to chicken instead of hamburger.

Social Security and Railroad Retirement’s cost-of-living adjustments to monthly benefits are designed to help retirees keep up with the rising living standards and costs. Currently, COLAs are tied to the Consumer Price Index for Urban Wage Earners (CPI-W), which surveys price changes in the average set of goods purchased by urban wage earners and clerical workers. But even the CPI-W formula fails to protect seniors’ purchasing power because it does not account for the fact that seniors spend two to three times as much of their budget on medical care than younger households, and since medical care inflation significantly outpaces our overall inflation, seniors today are falling behind. The Chained CPI method of COLA adjustments would make matters even worse.

Why is the Chained CPI bad for seniors in the short term and long term?

According to the Social Security Actuary, moving to a Chained CPI would mean an immediate benefit cut. According to Social Security Works, an organization whose mission includes maintaining and protecting our Social Security system, an average earner retiring in 2011 at age 65 would lose over $6,000 over 15 years if the Chained CPI COLA method was adopted. The Chained CPI assumes that a lower COLA is acceptable because consumers are expected to substitute cheaper, alternative products when prices increase. Health care costs, however, consume a large amount of seniors’ income. These costs cannot simply be substituted with a cheaper version. A senior cannot just substitute triple bypass surgery with a double because it’s cheaper. The Chained CPI ignores this reality and, instead, tries to balance the budget on the backs of our nation’s seniors.

What Should I Tell My Friends about the Chained CPI?

The Chained CPI is a back door way of trying to balance the budget on the backs of America’s seniors!

It’s an immediate Social Security and Railroad Retirement benefit cut! It’s not just a simple technical change without any impact — it’s an immediate, real cut to the benefits you have earned every year into the future.

It is NOT just a small benefit cut! Switching to a Chained CPI would compound benefit reductions dramatically over time, resulting in an annual benefit that is roughly $1,000 (2012 dollars) lower by the time a beneficiary reaches age 85.

We need a higher COLA — not a lower one! The current COLA is not enough — it does not accurately account for large health care cost increases faced by seniors and people with disabilities.

Is there a better alternative?

Yes! The Consumer Price Index for the Elderly (CPI-E). Senator Tom Harkin’s (D-IA) bill, called the Strengthening Social Security Act of 2013, S. 567, would establish the CPI-E method that more accurately reflects the cost of living for Social Security and Railroad Retirement beneficiaries, among other improvements. This alternative method takes into account the typical seniors’ real-world cost of living, including medical care and housing to ensure that seniors’ benefits keep pace with inflation.